The Real Costs of Buying a Condo

NEW YORK (MainStreet) -- Is it time to start thinking about buying that condo you’ve always wanted for retirement, a vacation home or investment? Some experts think so.

It’s been rumored that wealthy buyers are scarfing up their pricey condos in Miami, the poster child for the real estate collapse. Once-empty buildings are filling up, and construction has resumed on others that were all but abandoned.

Of course, the high-end market in Miami doesn’t represent trends in the condo market nationwide. Real estate markets are all local, and some can continue to fall even as others rise. But big price declines are often followed by rebounds, sometimes sooner than people expect.

What are the key factors in considering a condo purchase?

Though it’s hard to come by definitive data, it’s long been a rule of thumb that condos appreciate more slowly than single-family homes. That’s partly because many condos are second homes that people don’t really need, so demand can drop suddenly when the economy weakens.

A condo typically offers a more carefree lifestyle than a single-family home, because exterior maintenance and landscaping are handled by the condo association. This can cause problems if your neighbors vote to increase association dues when you’d rather not pay them.

Dues are likely to rise if many units are empty or their owners fall behind, so be sure to ask the condo association about its delinquency rate and any plans to charge more. Keep in mind that if you buy, the condo association will probably have the right to foreclose on your unit if you ever fall too far behind in dues.

Also inquire about the health of any additional funds set up for capital improvements like a new roof, driveway, pool overhaul or tennis court resurfacing. If this account is underfunded, the place could deteriorate or you could someday face a sizeable surcharge.

As with any real estate purchase, it’s important to look beyond the purchase price to consider the total cost of ownership, including those association fees, taxes and homeowner’s insurance.

You also may face a higher loan rate on a condo mortgage, often about 0.75 percentage points above rates for single-family homes because lenders consider the condo market more volatile. In fact, you may be unable to get a mortgage if more than 15% of the building’s owners are behind on their association dues.

Part of your purchase price and a large share of your dues will support the amenities like the gym, pool, tennis courts and barbecue areas. Be sure to find out what’s “free” and what will require an extra charge, like a second parking spot or dock space. Also, think carefully about buying a building flush with amenities you aren’t likely to use, as you’ll be helping to pay for them one way or another.

Before buying, make a number of visits at different hours, including rush hour and weekends, to get a sense of who your neighbors would be. Generally, a building is a better bet if most of the owners are full-time occupants rather than speculators looking to rent or flip the property for profit.

Real estate agents are reluctant to discuss other owners in detail for fear of violating anti-discrimination rules, but it’s especially important for a condo buyer to find out because the neighbors are close by and will make decisions affecting everyone’s expenses and lifestyle.

Finally, do your own research on sales prices in the building, even going back several years. Try zillow.com, and ask the condo association or building manager for past sales data. If they’re reluctant to share, take it as a red flag.

If prices have fallen dramatically, be wary of buying until there are six months of data showing they have leveled off. If prices are rising fast, that may be OK if they’re still well below the peaks during the bubble of a few years ago.